BP Midstream Partners LP (BPMP) CEO Robert Zinsmeister on Q2 2020 Results – Earnings Call Transcript

BP Midstream Partners LP (NYSE:BPMP) Q2 2020 Earnings Conference Call August 6, 2020 10:00 AM ET

Corporate Participants

Brian Sullivan – Vice President, Investor Relations

Robert Zinsmeister – Chief Executive Officer

Craig Coburn – Chief Financial Officer

Conference Call participants

Joe Martoglio – JPMorgan

Derek Walker – Bank of America

Theresa Chen – Barclays

Operator

Good morning everyone and welcome to the BP Midstream Partners 2Q ’20 Results Conference Call and Webcast. [Operator Instructions] Please also note, today’s event is being recorded.

At this time, I would like to turn the conference call over to Brian Sullivan, Vice President of Investor Relations. Sir, please go ahead.

Brian Sullivan

Hello and welcome everyone to BP Midstream Partners second quarter 2020 results presentation. I am Brian Sullivan, Vice President of Investor Relations. And I am joined remotely by Rip Zinsmeister, our Chief Executive Officer; and Craig Coburn, our Chief Financial Officer.

Before we begin, please take a moment to review our cautionary statement. During today’s presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to the factors we note on this slide and in our SEC filings.

We also refer to non-GAAP financial measures. Please refer to our SEC filings and supplemental information in this presentation for important disclosures related to these measures. These documents are also available on our Web site.

Now, over to Rip.

Robert Zinsmeister

Thanks Brian and good morning everyone and thank you for joining our call today.

I’m very pleased today to report to you a solid set of quarterly results and what was a tough second quarter, where we saw the continuation of a volatile and challenging environment. This is a testament to our portfolios ability to generate stable and resilient cash flows.

At BP Midstream Partners, we have remained focused on our two priorities. Firstly, our core value of safety, protecting the health and safety of operational personnel and other stakeholders through the COVID-19 pandemic, as well as remaining focused on operating our assets in a safe and reliable manner. And second, maintaining the financial strength of the partnership to ensure we continue to deliver financial stability. I would like to thank everyone at BP Midstream Partners and our sponsor BP for the resolve they have shown in the face of such a challenging environment. And I would like to acknowledge the support and helpful dialogue we have had with our unit holders during this past quarter. We will continue to remain engaged with you.

Our presentation today will be much shorter than last quarter. We previously described the attributes of our portfolio that underpin our ability to generate stable and resilient cash flows. And today’s results demonstrate that those attributes are indeed delivering as expected.

I’ll begin today with a brief update on our COVID-19 response, 2020 guidance and the status of minimum volume commitments or MVC arrangements with our sponsor, BP. Craig will then take you through the details of our second quarter operational and financial results and provide further details on our 2020 guidance. We will then take your questions.

Starting with our COVID-19 response. Today, we have not had any COVID-19 related issues impacting the availability of our pipelines. We continue to monitor local conditions and adapt our operating practices as appropriate. Our sponsor BP has been very supportive during this pandemic, applying their frontline operating practices to our assets and providing access to critical resources as necessary.

Second, our 2020 guidance, our existing full year guidance is unchanged. There are many factors, the impacts of which we cannot reasonably estimate at the present time to include them in our guidance. Craig will cover these shortly. However, we enter this volatile and challenging environment from a position of strength with a conservative financial framework and a strong liquidity position. And although there are signs of demand improvement and some reduced volatility, there are still operational and financial risks that we will continue to monitor and take actions to mitigate where possible.

With all of that said, we are very pleased with the operational financial performance of our portfolio, which Craig will speak to in more detail shortly. The confidence we have in our operational financial stability underpins our ability to continue providing guidance for the full year.

Third, MVC arrangements. Most of our MVCs expired at the end of 2020 except for one agreement relating to Diamondback which automatically renewed in June for another year. We are holding regular discussions with our sponsor regarding MVC arrangements. We expect to conclude these discussions and update you further with our third quarter results.

With that, I’ll hand over to Craig.

Craig Coburn

Thanks, Rip. Good morning everyone. Set against a challenging environment, we delivered a resilient set of operational and financial results. And our full year 2020 guidance remains unchanged as Rip previously mentioned. The impacts of COVID-19 and broader market volatility on pipeline throughput was much more apparent across our portfolio in the second quarter, compared to the first quarter set against a backdrop of significant product demand destruction across the U.S., industry-wide we saw reduced refinery utilization during the quarter. However, notwithstanding these conditions, our total gross throughput was only around 10% lower in the second quarter compared to the first quarter.

Further our adjusted EBITDA and cash available for distribution were broadly flat in the second quarter compared to the first quarter. Even though total gross throughputs declined during the quarter, earnings and cash flow remained resilient. Our operational and financial stability during the second quarter notwithstanding the environment conditions, clearly demonstrate our operating resilience, the benefits of a high quality balanced portfolio and the benefits of MVC arrangements.

Looking at throughput in more detail, total pipeline gross throughput was approximately 1.6 million barrels of oil equivalent per day in the second quarter, around 10% lower than the first quarter of 2020 as mentioned. Throughput on our onshore pipelines was around 14% lower compared to the first quarter. On BP 2 reduced volumes reflected lower refinery utilization and feedstock optimization as a result of the demand destruction from COVID-19. Throughput on River Rouge was lower driven by refined products demand destruction early in the second quarter, when we saw a demand in the U.S. for gasoline, diesel and jet fuel dropped by around 40%, 10% and 70%, respectively. And although lower in the first quarter throughput on this pipeline was better than we expected, with a faster recovery in the latter part of the quarter.

Throughput on Diamondback was consistent with historical average for the second quarter, driven by seasonally lower diluent demand and reduced Canadian heavy oil production. Throughput on our offshore pipelines was around 8% lower compared to the first quarter. This reflected the impacts of maintenance activities of offshore producers, tropical storm crystal ball and offshore producer constraints due to COVID-19 and lower crude price.

Net income attributable to the partnership for the second quarter was 40.6 million only 3% lower than the first quarter of 2020. That’s a really solid result given the second quarter macro conditions and lower throughput. The result reflected first, higher onshore revenues, the impacts on revenue from lower throughput across all our onshore pipelines. Together with lower fixed loss allowance revenue on BP 2 were more than offset by the favorable impact of recognizing deficiency revenue for the first half of 2020 in the second quarter.

And second, lower interest expense due to a lower interest rate on the new term loan. These two favorable impacts were offset by lower income from equity method investments due to lower throughput on our offshore pipelines. Adjusted EBITDA attributable to the partnership for the second quarter was 47.4 million. This was broadly flat compared with the first quarter of 2020. Again, this was a resilient result, notwithstanding the environment in the second quarter.

Cash available for distribution for the second quarter was 43.2 million, only 2% lower compared with the first quarter of 2020. So as you can see, our earnings and cash available for distribution remained resilient in the face of a challenging second quarter. The Board of Directors of the General Partner declared a second quarter distribution of 34.75 cents per unit consistent with the distribution level of the first quarter of 2020. The distribution coverage ratio for the second quarter was 1.15 comfortably in the middle of our target range of 1.1 to 1.2 times. Our ability to hold the second quarter distribution flat further demonstrates the confidence we have in our financial strength and cash flow stability.

Turning now to our guidance, our full year 2020 guidance remains unchanged. Adjusted EBITDA is expected to be in the range of 190 million to 200 million. Full year cash available for distribution is expected to be in the range 180 million to 190 million. Assuming we hold the current distribution level flat throughout the remainder of 2020, our full year distribution growth will be 5%, over the full year 2019 distribution. Our distribution coverage ratio for the full year is expected to approach the upper end of the target range of 1.1 to 1.2 times at current guidance levels.

During the second quarter, we grew the balance of our cash and cash equivalents by around 9 million. And based on our guidance, we expect to grow our cash balance by around 30 million this year. This growth on our cash balance underpins our ability to pursue organic growth projects to facilitate our mid to long-term growth while managing through the ongoing pandemic uncertainties.

The Mars expansion discussions continued to progress with producers and definitive agreements are expected to be signed by the end of the year and the project online in 2021. In addition to offshore growth projects, we’re also progressing on onshore growth options, including terminals. Having reaffirmed our 2020 guidance, I’d like to remind you that last quarter, we shared factors that we had reflected in our guidance as well as factors that we could not reasonably estimate the impacts of in order to include them in our guidance. Although some factors have now resolved themselves, such as continued deterioration in oil price, new ones have merged. At the time of our first quarter results, we included impacts from reduced FLA revenue, lower onshore asset throughput and reduced financing costs.

Our guidance today now also reflects two factors that we highlighted last quarter is not included in our guidance. First, storage revenues associated with the Mars pipeline. These revenues are now reflected in our actual second quarter results. We expect modest upside during the remainder of the year and if not reflected in our guidance. And second, operations and maintenance cost reductions, our sponsor has waived the increase of the omnibus fee paid to an affiliate of our sponsor for the period of April to December 2020. This demonstrates the support of our sponsor during this challenging period. These two factors are shown in bolded text on this slide under the heading reflected in guidance. There still remain some factors that we cannot reasonably estimate the impacts of in order to include them in our guidance. We highlighted these last quarter.

Our ability to maintain our guidance for 2020 notwithstanding the environment and uncertainty ahead is further evidence of the confidence we have in the operational and financial stability of the partnership.

Looking ahead to the third quarter, we expect pipeline gross throughput to be higher than the second quarter reflecting higher throughput on River Rouge as refined product demand conditions improved and higher throughput across our offshore pipelines, mostly due to expected higher throughput on Proteus and Endymion pipelines.

Adjusted EBITDA is forecast to be broadly flat compared to the second quarter. We expect higher revenue driven by increased throughput and tariff increases on our onshore pipeline and slightly higher income from equity method investments. These favorable impacts are expected to be largely offset by the absence of deficiency revenue at the level recognized in the second quarter.

Cash available for distribution is expected to be higher than the second quarter, reflecting increased revenues from onshore assets supported by tariff increases in the third quarter, as well as lower interest expenses associated with our term loan facility. And as I’m sure you can appreciate and understand our forecasts and expectations for the third quarter may change, given the ongoing uncertainty and volatility particularly surrounding COVID-19.

With that, I will hand back to Rip.

Robert Zinsmeister

Thanks, Craig.

Let me wrap up with a few last thoughts. We have delivered another solid quarterly result today. When we conceived BP Midstream Partners, we envisioned an asset portfolio capable of sustainably delivering stable cash flows. And that’s exactly what our portfolio did during this past quarter. We have remained focused on our two priorities.

First, our core value of safety, protecting the health and safety of operational personnel and other stakeholders, as well as remaining focused on operating our assets in a safe and reliable manner. And second, maintaining the financial strength of the partnership to ensure we continue to deliver financial stability. We are on track to deliver our full year 2020 guidance, recognizing that there remains considerable macro uncertainty ahead.

We’re on track to build cash while delivering full year distribution growth of 5% compared to 2019. And we will continue to provide you with a balanced view of the risks and opportunities in our guidance and mitigate the risks wherever possible. Our balance sheet and liquidity remain strong. We are in action on MVC arrangements with our sponsor. And we will update you further on this with our third quarter results. And we continue to pursue opportunities for organic growth investment in our portfolio.

Our Investor Relations team are always available to speak with you further outside of our quarterly results presentation.

Finally, BP Midstream Partners will be at the virtual City Midstream and Energy Infrastructure Conference next week. We look forward to speaking with many of you then.

With that, let’s open the phone lines and take questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we’ll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Jeremy Tonet. Please go ahead with your question.

Joe Martoglio

Hi, this is Joe on for Jeremy. Wanted to first ask on your kind of the current volume trends both onshore and offshore. I appreciate you talked a bit about River Rouge recovering towards the end of the second quarter. Did you see that continue in the third quarter and can you say where volumes are there now and also did you see a similar trend on BP 2 and your offshore pipeline?

Robert Zinsmeister

With respect to the underlying asset performance each assets actually is being driven by its own local market, right. So when we look at River Rouge, quite frankly, we’re a bit stunned on the turnaround. It was at half volumes in the depths of March. Right now we are above MVC level and we see that for the remainder of the year, each of us kind of live in our own bubble.

Both Craig and I have been in and out of the Midwest and you would think the traffic patterns on the highways if people are back to normal. So the kind of corporate local view is down 10% to 15%. But Whiting and our trading group are awfully good at what they do. So we’re above MVC on River Rouge. The sentiment is — aviation isn’t going to come back anytime soon, but River Rouge’s volumes are circa 2% or 4% jet fuel, so not really impacting that asset.

When I go to the Diamondback, we’re back in the summer season so there’s always seasonality on diluent with demand, need more diluent in the winter. So the asset is performing, okay. We don’t see much difference there in terms of the seasonal pattern. Then offshore really is about COVID and COVIDs impact on crewing, staffing and work over activity.

We saw a couple of blips on the assets, to lose a week you lose 200k in our top-line, basically across each specific asset. We think there’s going to be more turnaround and maintenance activity opportunistic through the summer. And we’re still not out of the hurricane season yet. Summing all that up when you take a look at our distribution versus our cover, we still feel that we have a very solid second half of the year.

I’m going to turn to Craig and see if you want to supplement that in any way.

Craig Coburn

Yes. I just picking up on — I think Joe asked also about BP 2. I think the Whiting refinery kit is actually running really well. Considering where demand is across nationwide when you look at the averages. BP 2 is also running well. But the Canadian diffs have been down a little bit historically, through the back half of second quarter and then in the third quarter. So there’s been a little less volume going down BP 2, but we’re protected by MVCs there.

We do see those differentials coming back already. I think there’s somewhere between $7 to $10 now, as those differentials come back, the volumes on BP 2 will also come back in the second half of the year. Does that answer your question, Joe?

Joe Martoglio

Yes. Thank you. That’s really helpful. I appreciate all the color there. And then, maybe if I can also ask just about the organic growth and I’m particularly thinking, looking, is there any more information you can say about the terminal opportunity? I’m assuming that from the KM Phoenix and what would kind of be the scope of any expansion there?

Robert Zinsmeister

We’ll keep this relatively succinct. It’s fair to say that when the sponsor entered into the Thorntons JV there’s synergistic opportunities to tie the important network into the BP system. So that’s where the investment opportunities lie principally. Okay?

Joe Martoglio

Okay. Yes, okay. Thank you. I’ll stop there.

Operator

And our next question comes from Derek Walker from Bank of America. Please go ahead with your question.

Derek Walker

Good morning, guys and congrats on a strong quarter. Maybe just on the guidance piece, I appreciate that you reiterated the range but some kind of moving parts. So can you just kind of clarify or give some color around what the contribution of the additional storage revenues at lube? And what the cost reduction contribution is? And I guess, is there any other change to guidance relative to sort of the volume expectations that relative to say first quarter that sort of baked in the second half of the year. Thanks.

Craig Coburn

Thanks, Derek. Yes and we’re not going to comment specifically on how much money we’re getting out of the storage revenues. But suffice it to say that, Rip talked about a few blips on the platforms with respect to COVID and some increased maintenance work. And I think between the water handling and the increased storage revenue that sort of made up for some of those downturns. And so, we were pleased with the distributions we’re getting from Mars in that respect.

I mean, I think we do see increased ramping of volumes on the offshore particularly around Proteus and Endymion as those fields are — [indiscernible] fields brought on by Shell in the second half of the year. We’re very cautious about this though Derek because it’s a different world out there working in the offshore these days. You have to make sure you have clean crews, you have to have clean contractor crews as well with the COVID coming in and bringing things up and down. And so I think they have done an amazing job of managing through all of that to have sort of volumes only be down sort of 10% across that world, given everything that they’ve been facing. So, we had a couple of smaller platforms shut in, due to economic reasons, but our trading groups across Shell, Exxon, BP also done a remarkable job of moving product through what was a pretty shaky time there back in April, as the Saudi crude came in, but we managed through all of that.

So we don’t see those types of headwinds in the back half of the year. But we’re being conservative in our guidance in the sense that the way things are working in the offshore are getting through it, but it’s not just the old world in terms of how things come on and come off in that respect.

What was the second part of your question?

Derek Walker

I think that pretty much answered it. I mean, I think I was just looking for contribution of the add-ins. And then, if there’s any adjustments relative to what you previously had factored in for some of the prior assumptions. So I think you’ve alluded to that. Maybe kind of in the follow up a little bit on the commentary around just BP 2 and the Canadian diffs. And I appreciate that you’ll — anticipating an update in what 3Q results around the MVC extension. But maybe can you give us a little bit of flavor around how the discussions have been going.

And what are some of the factors being discussed and what are some of the considerations as well around — you’re looking for certain dip levels or it’s just a matter of getting multi-year extensions and we anticipate that being at similar levels. Just want to get a little bit of sense of what those discussions have been like and recognize that the updates coming with 3Q results? Thanks.

Robert Zinsmeister

I will give you some color on this. Think about when we went public in 2017, there was a particular landscape that people anticipated, line three expansion, potential build of KXL and it’s been a very choppy market moving from 2017 to the current state.

In many respects, when diffs are highly attractive, we can’t get all the crude we like. And when there’s a lack of enforcement, that’s really the reflection of the market signals on the diffs. And they’re actually has been limited apportionment during the whole COVID period. But clearly there was also a decline in need for gasoline production, right?

Our affiliate would prefer to have greater certainty about what’s going on with line three. The Canadian regulator has suspended the open season and as I understand it, Enbridge those responses yet again tomorrow. And COVID is forced that whole process back in time.

Knowing what access you can have in line three and line three volumes would certainly make this a whole lot easier. And it would be fair to say, last year we anticipated we would know that this year, we still don’t know that. And that’s what’s contributed to both the [dislay] [ph] and the ambiguity on what is an appropriate MVC and for how long?

So we’ve gone back and forth on that topic and monitoring the market and monitoring line three events. If line three doesn’t provide us any greater certainty or closure, so to speak, we’ll have to look at some type of stopgap measure and not a longer term MVC.

That has not been decided nor concluded.

Derek Walker

Okay. Appreciate the comment.

Craig Coburn

Yes, Derek. I’d also like to say that increasingly as we move into 2021 and we will have discussions with you guys about the growth beyond 2020. The MVCs are an important piece, I think they help smooth the cash available for distribution quarter-to-quarter, but in the whole spectrum of where BPMP eventually goes they become less and less material longer term. And so we’ll be talking to you not just about MVCs on the onshore pipes, but we’ll be talking to you about the bigger package of what’s coming in terms of the growth in the offshore and how that all works together for a balanced portfolio.

Operator

[Operator Instructions] Our next question comes from Theresa Chen from Barclays. Please go ahead with your question.

Theresa Chen

Hi, there. I just like to start by asking a follow up question to the MVCs topic. Appreciate the commentary on the supply side in terms of the uncertainty related to the WCS differentials. And I’ve wanted to further touch upon your comment Rip about the demand side of things how — there’s not as much demand for gasoline production and such. As you speak with your affiliate about renegotiating the MVC, what is the outlook for, general refining utilization at Whiting next year and beyond post this unprecedented demand shock and especially as we’re still working through some sloppy inventories from a macro perspective.

Robert Zinsmeister

It’s probably fair to say that we’re blessed with advantaged assets in Whiting. [Indiscernible] number one or two in your market and when people catch your cold, some are dying of pneumonia and you’re still highly profitable. That is an outstanding asset. We have run at [indiscernible] recently, okay? So we’re not seeing perhaps what like fourth quartile refiners would see in terms of access to the market ability to move product, ability to make product and still making money, okay?

So we actually really haven’t had much of a conversation that has any kind of market hints to it.

Craig Coburn

I guess I would build on that, Theresa. Theresa I will build on that to say that what we’re talking about is a refinery that’s actually probably was less underutilized than most during the second quarter and has come back strong and that’s evidenced by, you see the product volumes down River Rouge, recovering quite quickly and being well above MVCs now, already, in sort of June and July and into August.

What we’re really wrestling with The BP 2 volumes is really more a crude slight optimization issue with the Canadian diffs. So, once that moves back to normality, we would expect to see the volumes on BP 2. So, there’s two ways to get food into Whiting, BP 2 and there’s another pipe that comes in. And so, I don’t think that decreased volumes on BP 2 are necessarily indicative of how Whiting has been running through this whole thing.

Theresa Chen

Got it. And then switching to the offshore side, so you mentioned having to work through the Saudi flotilla that headed our way during the second quarter. And as we kind of look to the near to medium term seems that incremental production from Russia and OPEC countries going to ramp up in some order, potentially widening out that medium power differential. How do you think about economics on the offshore side in light of all that?

Robert Zinsmeister

So I’ll start. Honestly speaking, we are — me personally, I was surprised by how in Q2 different crudes attracted premium prices relative to other crudes, partly because of supply disruption elsewhere in the world. And this was principally on the March quarter and people were bidding up and we’re only talking $1 barrel, right so we’re not talking wild swings in value, but just because of who could get to what various crudes removing at a premium vis-à-vis, the historical pattern.

I think we take comfort between Shell and BP and Exxon, the owners of the fields in our pipes, they’re all very sophisticated companies and they will move their product to market. I can’t give you any better answer than that.

Craig Coburn

Yes. And I guess from a visibility standpoint, I think we only see that getting — we’ve only saw that getting better over time. And there was a time there, I guess in second quarter where it was a bigger concern. And I think we’re not hearing those types of concerns from our trading organization these days.

So it’s very — as you saw from the results of the IOC majors and their trading, it was extremely beneficial to have high-quality trading and supply groups. I think that also carries through to your onshore also carries through to your product sales as well, having good supply organizations to move gasoline when it’s down 10% to 15% is also very important. And, BP has that type of a trading supply organization, the other majors do as well. But in the times like this, it tends to really stand out versus some of the other smaller players.

Robert Zinsmeister

So there was angst in the second quarter, it was really about tank tops. And what happens if you actually don’t have a home for crude. It seems we’re through that.

Theresa Chen

Got it. And speaking of finding a home for crude, just on the group storage piece and the added benefit from incremental revenues there. Was that a result of super Contango opportunities and if so, how long were you able to trim that out for us and it’s just a benefit that we should be able expect into 2021 beyond or was it relatively short-term in nature?

Robert Zinsmeister

I’d say we had a soft Contango and we kind of have a soft Contango right now, our guidance is, don’t expect any further upside on this partly because cabin size are finite, right? If you look, back in history, there are periods where 10s of millions of dollars have been made in a super Contango environment in a single year. That’s obviously shared amongst the partner, so would never go to our bottom-line. This is kind of at best 10 million for BPMP net. So it’s not a large outside in our results at all. But it’s nice to have in a difficult market. And it’s really more a mitigate of the environment that you get these benefits.

Theresa Chen

Thank you very much.

Craig Coburn

Just to come back on that Theresa, I think the 10 million Rip speaking to was a gross number. So adding that to the BPMP. I mean, what we’ve told you in our guidance was to — it’s not in our guidance going forward, if there’s upside with those storage revenues, or handling revenues, it will come through. But we’re not counting on it in our guidance right now.

Operator

Ladies and gentlemen, with that we will conclude today’s question-and-answer session. We will also conclude today’s conference call. And we thank you all for joining today’s presentation. You may now disconnect your lines.

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